Securitisation Swaps

CHAPTER 3Asset‐Backed Debt Structures

Follow the money…

Securitisation swaps are deeply embedded inside the asset‐backed structures they support. They aren't just bolted on in the way other derivatives usually are. For example, a fund manager who wishes to enter into a currency hedge for an offshore asset might use a foreign exchange (FX) forward. This FX forward will take the same form no matter whether the asset is a portfolio of equities or a power station. In contrast, the cash flows of securitisation swaps must precisely match the cash flows generated by the underlying asset pool within the securitisation or covered bond structure: it must be a perfect hedge. Without this lockstep alignment, the securitisation swap will not remove the market risk from the asset‐backed structure, which will invariably result in a lower credit rating and hence a higher cost of funding for the originator. Thus, in order to model securitisation swaps, it is critical to ‘look through’ and understand some key features of the underlying structure.

This chapter will cover the spectrum of common underlying structures in order to lay a foundation for the detailed securitisation swap modelling covered in Chapters 5–7. There are many more aspects of securitisation and covered bond structuring, which will not be covered; the sole focus here is discussing what is needed to model the swaps.

The starting point for understanding asset‐backed structures is with the underlying debt obligations. Residential ...